A company is considering the purchase of a $200,000 piece of equipment. The equipment is classified as 5-year MACRS property. The company expects to sell the equipment after five years at a price of $30,000. The relevant tax rate is 20%. What is the after-tax cash flow from this sale?
MACRS 5-year property
Year Rate
1 20.00%
2 32.00%
3 19.20%
4 11.52%
5 11.52%
6 5.76%
The after tax cash flow is computed as shown below:
= Sales value - tax expenses
Book value is computed as follows:
= Purchase price - Depreciation till year 5
= $ 200,000 - (20% + 32% + 19.20% + 11.52% + 11.52%)
= $ 200,000 - 94.24%
= $ 11,520
Profit on sales is computed as follows:
= Sales value - book value
= $ 30,000 - $ 11,520
= $ 18,480
So, the operating cash flow will be as follows:
= Sales value - Profit on sales x tax rate
= $ 30,000 - $ 18,480 x 20%
= $ 26,304
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